In the world of e-commerce, building a successful business is no small feat. But the ultimate goal for many e-commerce brand owners is to scale their brands and, eventually, achieve a profitable sale. However, achieving this goal can be a challenging endeavor, especially if you’re not prepared for the potential pitfalls that lie ahead. In this comprehensive guide, we’ll delve into the essential strategies to help you avoid these common e-commerce business pitfalls, all with the objective of optimizing your business for a successful sale.
[00:00:00] Scot Deetz Emphasizes the Importance of Strategic Planning for Business Exit.
[00:01:34] Introduction of Scott Deetz from Northbound as an Expert in Business Exits.
[00:02:18] Scott Shares His Background and the Genesis of Northbound.
[00:03:21] Discussion of Northbound’s Role in Helping Businesses Exit.
[00:06:24] The Significance of Spending Time Planning for the Exit.
[00:10:55] Thinking from the Buyer’s Perspective Is Crucial in Building an Exitable Business.
[00:13:08] The Impact of Business Model Choice on Exitability.
[00:18:01] An Example of Solving Challenges in Highly Seasonal Businesses.
[00:19:38] How Proactive Problem-Solving Can Enhance the Value of a Business.
[00:20:49] The Competitive Advantage Often Lies in Financial Arrangements Rather Than the Front End.
The Scott Story: Learning from Failure to Success
Before we dive into the intricacies of avoiding e-commerce business pitfalls, let’s take a moment to draw inspiration from Scott’s story. Scott, like many e-commerce entrepreneurs, initially attempted a DIY exit strategy for his business, only to see it fail. However, he didn’t give up. Instead, he brought in an advisor, and the results were astonishing: not only did he secure a deal, but it was also three times more valuable than his initial attempt.
Scott’s journey began in 2013 when he entered the world of Amazon as a seller. Over five years, he honed his skills, but he discovered that his true passion lay in helping others achieve their financial goals. This realization led to the birth of Northbound Group, which started facilitating exits in 2016, even before the rise of e-commerce aggregators.
With a team of 25 full-time experts and over half a billion dollars in exits, Northbound Group focused its efforts on e-commerce, be it physical goods or service providers. The key to their success? Advisors who played a pivotal role in Scott’s exit journey.
Investment Bank vs. Broker: Your Partners in Success
Before we explore the e-commerce pitfalls, it’s essential to understand the role of investment banks and brokers. These professionals not only help create an exitable and sellable company but also guide you through the complex process of exiting. They are your partners, both pre and post-sale.
Now, let’s delve into the critical aspects of avoiding e-commerce business pitfalls.
Before You Go to Market: The Importance of Exit Planning
One of the most significant mistakes e-commerce entrepreneurs make is not planning for their exit. Shockingly, over 50% of the money you make in your business will come from the exit. To put it into perspective, imagine if someone told you that more than half of your lifetime earnings depended on a single event. How much time would you dedicate to preparing for it?
Often, decisions are made in a vacuum, detached from exit planning. It’s analogous to ignoring the cost of goods sold (COGS) when calculating product margins. In this context, your exit strategy should be integral to your overall business plan.
Thinking from the Buyer’s Perspective
Scott’s mentor once emphasized the importance of thinking from the buyer’s perspective rather than solely from your own. Building trust with potential buyers requires highlighting the benefits and providing proof. Buyers want to see how your e-commerce business can fulfill their needs and expectations.
Selecting a Sellable Business Strategy
One of the most critical decisions an e-commerce entrepreneur can make is choosing a sellable and valuable business strategy. An example that illustrates this point is that of a one-product seller who had several profitable products but lacked an organized brand.
Their model was based on selecting products with high net margins but no cohesive brand identity. These products, while individually successful, had no relationship with each other. They all ranked among the top three in their respective niches. However, the big question for potential buyers was, “How can I expand this business?”
Moreover, the business faced several other issues. It was highly seasonal, carried hundreds of SKUs with very low volume, and lacked a cohesive plan for exit. To make your business more attractive to potential buyers, you must think from the buyer’s perspective and work backward.
Product Selection Matters
When evaluating your product selection, ask yourself, “How sellable will this business be?” Consider factors like seasonality and potential solutions. For instance, a $5 million exit might be hindered if your business is only worth $750,000 due to difficulties in stocking inventory to leverage seasonality.
Northbound Group, for example, did not aim for an immediate exit but focused on winning favorable supplier terms. They understood that many businesses, like theirs, were highly seasonal. To address this challenge, they renegotiated supplier terms, such as receiving a 20% down payment with the balance due 120 days after the holiday season, and the final payment was scheduled 180 days out.
This strategy allowed both Northbound and their suppliers to grow together, solving the seasonality issue. The key takeaway here is that capital allocation and correct ordering are critical for businesses with seasonal fluctuations. Remember, negotiation isn’t just sending an email and accepting a “no” as the final answer.
Proper Exit Planning: The Road to Success
In the world of e-commerce, planning for a successful exit is often overlooked, yet it’s a crucial aspect of achieving financial freedom and maximizing the value of your business. Don’t fall into the common pitfalls that many e-commerce entrepreneurs face. Instead, take the time to strategize, think from the buyer’s perspective, and select a business model that is not only profitable but also highly sellable.
Stay tuned as we delve deeper into other essential aspects of avoiding e-commerce business pitfalls and guide you toward a successful sale. In the next section, we will explore how a lack of scalability can impact your business’s exit potential.